SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
Commission file number
0-23246
DAKTRONICS, INC.
South Dakota 46-0306862
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
331 32nd Avenue Brookings, SD 57006
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (605) 697-4000
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(Former name, address, and/or fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 31, 1999
Common Stock, No par value 4,372,941
Daktronics, Inc.
Table of Contents
Part I. Financial Information Page(s)
Consolidated Balance Sheets -
July 31, 1999 and May 1, 1999 ............................ 3 - 4
Consolidated Statements of Operations
Three months ended
July 31, 1999 and August 1, 1998 ......................... 5
Consolidated Statements of Cash Flows -
Three months ended July 31, 1999 and
August 1, 1999............................................ 6
Notes to Consolidated Financial Statements................ 7 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 9 - 12
Part II. Signatures................................................ 13
2
DAKTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
JULY 31,
1999 MAY 1,
ASSETS (UNAUDITED) 1999
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CURRENT ASSETS
Cash and cash equivalents ............. $ 267 $ 1,050
Accounts receivable less allowance
for doubtful accounts of $243 at
July 31, 1999 and $212 at May 1, 1999 20,178 19,832
Current maturities of long-term
receivables ......................... 2,018 2,300
Inventories ........................... 15,326 13,864
Costs and estimated earnings in
excess of billings on uncompleted
contracts ........................... 10,134 5,374
Prepaid expenses and other ............ 285 311
Deferred income tax benefit ........... 1,139 1,476
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Total current assets ................ $49,347 $44,207
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LONG-TERM RECEIVABLES
AND OTHER ASSETS
Long-term receivables,
less current maturities ............. $ 5,675 $ 6,048
Intangible assets and other ........... 548 621
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$ 6,223 $ 6,669
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PROPERTY AND EQUIPMENT,
at cost
Land ................................ $ 539 $ 532
Buildings ........................... 6,034 5,459
Machinery and equipment ............. 14,883 14,036
Office furniture and equipment ...... 2,051 1,997
Transportation equipment ............ 844 744
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$24,351 $22,768
Less accumulated depreciation ......... 11,579 11,025
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$12,772 $11,743
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$68,342 $62,619
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The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
DAKTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
JULY 31,
1999 MAY 1,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1999
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CURRENT LIABILITIES
Notes payable, bank ......................... $ 5,650 $ 2,659
Current maturities of
long-term debt ............................ 1,951 1,951
Accounts payable ............................ 8,508 8,815
Customer Deposits ........................... 93 1,292
Accrued expenses ............................ 4,066 5,293
Billings in excess of costs and
estimated earnings on uncompleted contracts 7,795 2,970
Income taxes payable ........................ 193 635
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Total current liabilities ................... $ 28,256 $ 23,615
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LONG-TERM DEBT
Less current maturities ..................... $ 7,802 $ 8,275
DEFERRED INCOME ............................... $ 501 $ 602
DEFERRED INCOME TAXES ......................... $ 515 $ 626
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized 30,000,000 shares
Issued July 31, 1999 4,374,861 shares
May 1, 1999 4,374,861 shares .............. $ 11,819 $ 11,819
Retained earnings ........................... 19,458 17,691
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$ 31,277 $ 29,510
Less:
Cost of 4,920 treasury shares ............... (9) (9)
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$ 31,268 $ 29,501
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$ 68,342 $ 62,619
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
DAKTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share)
(unaudited)
THREE MONTHS ENDED
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JULY 31, AUGUST 1,
1999 1998
(13 WEEKS) (13 WEEKS)
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Net sales ...................... $ 31,467 $ 22,236
Cost of goods sold ............. 23,233 15,939
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Gross profit ............... $ 8,234 $ 6,297
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Operating expenses:
Selling ...................... $ 3,273 $ 2,638
General and administrative ... 913 952
Product design and development 1,016 868
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$ 5,201 $ 4,458
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Operating income ........... $ 3,033 $ 1,839
Nonoperating income (expense):
Interest income .............. 91 102
Interest expense ............. 264 (174)
Other income ................. 106 94
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Income before income taxes . $ 2,966 $ 1,861
Income tax expense ............. 1,199 748
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Net income ................. $ 1,767 $ 1,113
======== ========
Earnings per share:
Basic ...................... $ .41 $ .26
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Diluted .................... $ .39 $ .25
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The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
DAKTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
THREE MONTHS ENDED
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JULY 31, AUGUST 1,
1999 1998
(13 WEEKS) (13 WEEKS)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................... $ 1,767 $ 1,113
Adjustments to reconcile net income to
net cash (used in) operating activities:
Depreciation ......................... 554 408
Amortization ......................... 73 80
Provision for doubtful accounts ...... 31 31
Change in operating assets and
liabilities ........................ (4,143) (2,914)
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Net cash (used in)
operating activities ........... $(1,718) $(1,282)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ....... $(1,583) $(1,395)
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Net cash (used in)
investing activities ............. $(1,583) $(1,395)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on notes payable .......... $ 2,991 $ 2,697
Principal payments on
long-term debt ......................... (473) (71)
Proceeds from exercise of stock options .. -- 33
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Net cash provided by
financing activities ................. $ 2,518 $ 2,659
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Decrease in cash and cash equivalents .. $ (783) $ (18)
Cash and cash equivalents:
Beginning ................................ 1,050 148
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Ending ................................... $ 267 $ 130
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The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
DAKTRONICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A. GENERAL
The consolidated financial statements include the accounts of
Daktronics, Inc. and its wholly-owned subsidiary, Star Circuits, Inc.
Intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with instructions for Form 10-Q and,
accordingly, do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation have been included.
These statements should be read in conjunction with the financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended May 1, 1999, previously filed with the Commission.
Earnings per share are calculated in accordance with the provisions
of FASB Statement No. 128, "Earnings Per Share". A reconciliation of the income
and common stock share are amounts used in the calculation of basic and diluted
earnings per share for the three months ended July 31, 1999 and August 1, 1998
follows (amounts in thousands except per share amount):
Per
Net Share
Income Shares Amount
------ ------ ------
For the three months ended July 31, 1999:
Basic EPS .................... $1,767 4,345 $ 0.41
Effect of dilutive securities:
Exercise of stock options .. -- 165 0.02
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Diluted EPS .................. $1,767 4,510 $ 0.39
====== ====== ========
For the three months ended August 1, 1998:
Basic EPS .................... $1,113 4,324 $ 0.26
Effect of dilutive securities:
Exercise of stock options .. -- 71 0.01
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Diluted EPS .................. $1,113 4,395 $ 0.25
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NOTE B. INVENTORIES
Inventories consist of the following (in thousands):
July 31, May 1,
1999 1999
Raw materials ............................ $11,556 $ 8,465
Work-in-process........................... 1,890 1,596
Finished goods............................ 1,790 3,803
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$15,236 $13,864
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7
NOTE C. LITIGATION
On February 17, 1999, Daktronics was sued in the circuit court of
Hillsborough County, Florida by the Buccaneers Football Stadium Limited
Partnership, an affiliated company of the Tampa Bay Buccaneers football team.
The lawsuit alleges that the video displays installed at Raymond James Stadium
in Tampa, Florida do not meet the contract requirements. The lawsuit seeks
either to rescind the contract under which Daktronics furnished the scoring and
display equipment for the Stadium and obtain the return of all funds paid or to
obtain damages for breach of contract. The Tampa Sports Authority owns Raymond
James Stadium and is not a plaintiff in the action.
The contract, valued at approximately $7.9 million, included two
large end zone scoreboards with video displays, sideline auxiliary scoreboards,
advertising panels and installation. Daktronics has received approximately $3.1
million in payments under the contract and has unpaid invoices outstanding in
the amount of approximately $2.9 million. In addition, the plaintiff is in
default on a payment in the amount of $257,000 under a promissory note to
Daktronics as part of the contract. Daktronics believes these payments have been
unreasonably withheld and has filed a counterclaim for these payments, related
interest and acceleration of remaining payments under the promissory note.
The Company has recorded a provision for estimated costs to be
incurred in connection with the litigation described above as well as other
miscellaneous claims and litigation arising in the ordinary course of business.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion highlights the principal factors affecting
changes in financial condition and results of operations.
This review should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
GENERAL
The Company designs, manufactures and sells a wide range of
computer-programmable information display systems to customers in a variety of
markets throughout the world. The Company focuses its sales and marketing
efforts on markets rather than products. Major categories of markets include
Sports, Business and Government.
The Company's net sales and profitability historically have
fluctuated due to the impact of large product orders, such as display systems
for the Olympic Games and major league sports, as well as the seasonality of the
sports market. The Company's gross margins on large product orders tend to
fluctuate more than those for small standard orders. Large product orders that
involve competitive bidding and substantial subcontract work for product
installation generally have lower gross margins. Although the Company follows
the percentage of completion method of recognizing revenues for these large
orders, the Company nevertheless has experienced fluctuations in operating
results and expects that its future results of operations may be subject to
similar fluctuations.
The Company operates on a 52 - 53 week fiscal year, with fiscal
years ending on the Saturday closest to April 30 of each year. The first three
quarters end on the Saturday closest to July 31, October 31 and January 31.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales
represented by items included in the Company's Consolidated Statements of
Operations for the periods indicated:
THREE MONTHS ENDED
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JULY 31, AUGUST 1,
1999 1998
(13 WEEKS) (13 WEEKS)
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Net sales......................... 100.0% 100.0%
Cost of goods sold................ 73.8% 71.7%
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Gross profit...................... 26.2% 28.3%
Operating expenses................ 16.5% 20.0%
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Operating income.................. 9.6% 8.3%
Interest income................... 0.3% 0.5%
Interest expense.................. (0.8%) (0.8%)
Other income ..................... 0.3% 0.4%
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Income before income
taxes................. 9.4% 8.4%
Income tax expense................ 3.8% 3.4%
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Net income ...................... 5.6% 5.0%
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9
NET SALES
Net sales were $31.5 million for the three months ended July 31,
1999 compared to $22.2 million for the three months ended August 1, 1998. The
increase in net sales was due primarily to increases in net sales in the college
and university, arenas and auditoriums and major league niches of the sports
markets. The increases in these market niches were primarily the result of
increased ProStar(R) Video Plus sales.
GROSS PROFIT
Gross profit increased to $8.2 million for the three months ended
July 31, 1999 from $6.3 million for the three months ended August 1, 1998. The
increase in gross profit was the result of an increase in net sales which was
somewhat offset by lower gross profit percentage of net sales.
OPERATING EXPENSES
Selling expenses were $3.3 million for the three months ended July
31, 1999 and $2.6 million for the three months ended August 1, 1998. As a
percent of sales, selling expenses decreased 1.5%.
General and administrative expenses were $913,000 for the three
months ended July 31, 1999 compared to $952,000 for the three months ended
August 1, 1998.
Product design and development expenses increased to $1.0 million
for the three months ended July 31, 1999 from $868,000 for the three months
ended August 1, 1998. The increase was due to a greater number of product
development projects which included continued improvement of the Company's new
LED video product, and upgrading and expanding existing products.
INTEREST INCOME
The Company occasionally sells products on an installment basis or
in exchange for advertising revenues from the scoreboard or display, both of
which result in long-term receivables. Interest income decreased to $91,000 for
the three months ended July 31, 1999 from $102,000 for the three months ended
August 1, 1998.
INTEREST EXPENSE
Interest expense increased to $264,000 for the three months ended
July 31, 1999 from $174,000 for the three months ended August 1, 1998. The
increase was the result of an increase in average loan balances.
INCOME TAX EXPENSE
Income tax expense as a percentage of income before income taxes was
40% for both the three months ended July 31, 1999 and August 1, 1998,
respectively.
NET INCOME
Net income increased to $1.8 million from $1.1 million for the three
months ended July 31, 1999 and August 1, 1998, respectively. The increase was
due primarily to the increase in net sales.
Management believes that one of the principal factors that will
affect net sales and income growth is the Company's ability to increase the
marketing of its products in existing markets and expand the marketing of its
products to new markets.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $21.1 million at July 31, 1999 and $20.6 million
at May 1, 1999. Working capital provided by net income, depreciation and
amortization was offset by purchases of property and equipment and repayment of
long-term debt. The Company has historically financed working capital needs
through a combination of cash flow from operations and borrowings under bank
credit agreements.
10
Cash used by operations for the three months ended July 31, 1999 was
$1.7 million. Net income of $1.8 million plus depreciation and amortization of
$627,000 were offset by an increase in inventories including costs and estimated
earnings in excess of billings on uncompleted contracts. Cash used by investing
activities consisted of $1,583,000 of purchases of property and equipment. Cash
provided from financing activities included $2,991,000 net borrowings under the
Company's line of credit. Cash used for financing activities consisted of
$473,000 of repayment of long-term debt.
The Company has used and expects to continue to use cash reserves
and bank borrowings to meet its short-term working capital requirements. On
large product orders, the time between acceptance and completion may extend up
to 12 months depending on the amount of custom work and the customer's delivery
needs. The Company often receives a down payment or progress payments on these
product orders. To the extent that these payments are not sufficient to fund the
costs and other expenses associated with these orders, the Company uses working
capital and bank borrowings to finance these cash requirements.
The Company's product development activities include the enhancement
of existing products and the development of new products from existing
technologies. Product development expenses were $1,016,000 for the three months
ended July 31, 1999 and $868,000 for the three months ended August 1, 1999. The
Company intends to continue to incur these expenditures to develop new display
products using various display technologies to offer higher resolution, more
cost effective and energy efficient displays. Daktronics also intends to
continue developing software applications for its display controllers to enable
these products to continue to meet the needs and expectations of the
marketplace.
The Company has a credit agreement with a bank. The credit agreement
provides for a $15.0 million line of credit which includes up to $2.0 million
for standby letters of credit. The line of credit is at LIBOR rate plus 1.55%
(6.74% at July 31, 1999) and is due on October 1, 2002. As of July 31, 1999,
$5.7 million had been drawn on the line of credit and no standby letters of
credit had been issued by the bank. The credit agreement is unsecured and
requires the company to meet certain covenants. Financial covenants include the
maintenance of tangible net worth of at least $23.0 million, a minimum liquidity
ratio, a limit on dividends and distributions, and a minimum adjusted fixed
charge coverage ratio.
The Company is sometimes required to obtain performance bonds for
display installations. The Company currently has a bonding line available
through an insurance company that provides for an aggregate of $50.0 million in
bonded work outstanding. At July 31, 1999, the Company had $9.1 million of
bonded work outstanding against this line.
The Company believes that if its growth continues, it may need to
increase the amount of its credit facility. The Company anticipates that it will
be able to obtain any needed funds under commercially reasonable terms from its
current lender. The company believes that cash from operations, from its
existing or increased credit facility, and its current working capital will be
adequate to meet the cash requirement of its operations in the foreseeable
future.
BUSINESS RISKS AND UNCERTAINTIES
A number of risks and uncertainties exist which could impact the
Company's future operating results. These uncertainties include, but are not
limited to, general economic conditions, competition, the Company's success in
developing new products and technologies, market acceptance of new products, and
other factors, including those set forth in the Company's SEC filings, including
its current report on Form 10-K for the year ended May 1, 1999.
11
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a
year in the date field, with the result that data referring to the Year 2000 and
subsequent years may be misinterpreted by these programs. If present in the
computer applications of the Company or its suppliers and not corrected, this
problem could cause computer applications to fail or to create erroneous results
and could cause a disruption in operations and have an adverse effect on the
Company's business and results of operations. The Company evaluated its
principal computer systems and implemented a new enterprise resource planning
software which was fully operational in fiscal 1999 and has been represented by
the vendor to be Year 2000 compliant. The Company has tested the software for
Year 2000 compliance. The cost of the new software was capitalized. The Company
has assurances from a majority of its key suppliers indicating that they are
Year 2000 compliant. The Company has not incurred any material expenses to date
in connection with this evaluation, and does not anticipate material expenses in
the future. The Company has reviewed its computer programs which it includes in
its display systems and has substantially completed the implementation changes
to be Year 2000 compliant. Based on the Company's review, management does not
believe the remaining remediation costs to be incurred will be material to the
Company's financial position and results of operations.
The Company has identified alternative suppliers in the event that
its key suppliers fail to adequately address the Year 2000 issue.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board and the Accounting
Standards Executive Committee have issued certain Statements of Financial
Accounting Standards and Statements of Position, respectively, which have
required effective dates occurring after the Company's May 1, 1999 year end. The
Company's financial statements, including the disclosures therein, are not
expected to be materially affected by those accounting pronouncements.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Aelred J. Kurtenbach, Chairman and CEO
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Daktronics, Inc.
(Dr. Aelred J. Kurtenbach, Chairman and CEO)
(Chairman and CEO)
Date September 10, 1999
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/s/ Paul J. Weinand, Treasurer
--------------------------------
Daktronics, Inc.
(Paul J. Weinand, Treasurer)
(Principal Financial Officer)
13